Saturday, January 23, 2010

More on this week's column

Slyvia, one of my Hurriyet readers, asked the following questions in a comment to last week's column:
One thing I did not understand however: you write: "This recent lira frenzy, intriguingly, has not really been balanced by locals’ foreign currency retail buying, one of the big trends of last year" Where did the locals get the foreign currency from? Do you mean minor sums such like tips to the touristic workers, or larger ones - obtained how? Because activites with foreign companies wouldin any case go through banks and therewould be no foreign currency to spend in retail - or do I incur into a "thinking error"?
To which, I replied:
the locals get the foreign currency from banks/exchange bureaus and then deposit them at the bank. This shows up in the statistics as foreign currency deposits held by local residents, also in the same press bulletin. A trend in Turkey is that whenever the lira weakens against the dollar and euro, residents sell foreign currency, meaning that they convert some of their FX deposits into lira, and this acts as a buffer to further lira weakening. This is one of the rare advantages of being a dollarized economy. Of course, the opposite is true as well, meaning that when the lira strengthens, these guys buy dollars. Or rather "was true": As I mentioned in my column, this pattern has not been continuing recently. The interesting question is why? I will dwell on this issue a bit more in my blog and provide a nice graph showing the relationship between FX deposits and USDTRY(dollar lira exchange rate), so check there in a couple of days.
Well, it is time to keep my promise:

Boy, that's what I call a mirror image:)...

BTW, the exchange rate basket is just what it is: A basket of EURTRY and USDTRY, weighed equally. In these things, I usually use the basket to make sure my results are not affected by EURUSD moves.

There is also an interesting between EUR and USD deposits, as a friend who is a senior retail banker noted some time ago. This analysis obviously does not deal with such intra-FX shifts, the modeling of which is a long-time dream of mine...

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